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Intro to Blockchain and Bitcoin

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Slides from an old class, part of my course on Social Innovation in Finance. Topics: Digital crypto currencies, bitcoin, and the blockchain.

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Intro to Blockchain and Bitcoin

  1. 1. Digital Currencies (Bitcoin)ENT 470 Social Innovation in Finance Alessandro Lanteri alessandro.lanteri@faculty.hult.edu HULT International Business School - Summer One 2016
  2. 2. Schedule More or less… Break 15 min9 am Money ca. 60 min. 10:30 pm Blockchain + Bitcoin ca. 60 min. Mark Lamb CEO & Co-Founder CoinFloor 11:30 pm Guest Lecturer ca. 60 min. 12:30 pm Wrap up
  3. 3. Digital Currencies vs. Money
  4. 4. Paul Kemp Robertson Contagious Communications http://www.ted.com/talks/paul_kemp_robertson_bitcoin_sweat_tide_meet_the_future_of_branded_currency Bitcoin. Sweat. Tide. Meet the future of branded currency. Private Money the daring and fascinating alternatives to government-backed currencies w atch at hom e ENT 470
  5. 5. ECB(2012);Alietal.(2014) A history of Money (very, very, very brief) commodities goods with intrinsic value cows, pottery, shells, grains… commodity-backed items representing underlying commodities with intrinsic value gold certificates… fiat money legal tender issued by a central (trusted) authority USD, GBP… trust is very important (e.g., dollarization) ENT 470
  6. 6. Alietal.(2014) The functions of Money Classical theory of money NOTE: money with such functions is not necessarily legal tender (ex. gold, diamonds…) Store of value money can be saved and retrieved in the future. Medium of exchange money is used as an intermediary in trade to avoid the inconveniences of a barter system, i.e. the need for a coincidence of wants between the two parties involved in the transaction. Unit of account money acts as a standard numerical unit for the measurement of value and costs of goods, services, assets and liabilities. example: trading cards, hours…example: houses… example: cigarettes… ENT 470
  7. 7. Alietal.(2014) The functions of Money Hierarchy of functions Unit of account Medium of exchange Store of value money is a social convention as such, it evolves over time not all the functions must be present at all times and for all constituencies ENT 470
  8. 8. ECB(2012) Types of currencies formats and legal status ENT 470
  9. 9. ECB(2012) Types of virtual currencies with respect to their relationship with legal tender and real goods Closed virtual currencies Almost no link to the real economy and sometimes called “in-game only” schemes. Users usually pay a subscription fee and then earn virtual money based on their online performance. The virtual currency can only be spent by purchasing virtual goods and services offered within the virtual community and, at least in theory, it cannot be traded outside the virtual community. Unidirectional flow The virtual currency can be purchased directly using real currency at a specific exchange rate, but it cannot be exchanged back to the original currency. The currency is used to purchase virtual goods and services, but some may also allow their currencies to be used to purchase real goods and services.. Bidirectional flow Users can buy and sell virtual money according to the exchange rates with their currency. The virtual currency is similar to any other convertible currency with regard to its interoperability with the real world. These schemes allow for the purchase of both virtual and real goods and services. example: Facebook Credit, air miles… example: WoW Gold… example: Linden Dollars, Bitcoin… ENT 470
  10. 10. ECB(2012) Types of virtual currencies with respect to their relationship with legal tender and real goods ENT 470
  11. 11. ECB(2012) Electronic vs Virtual Money Types of money schemes digital electronic virtual digital traditional currency ‘universal’ legal money inst. fixed invented currency within a community non-fin. company determined by issuer money format unit of account acceptance issuer supply guaranteed not guaranteedredeemability ENT 470
  12. 12. ECB(2012) Virtual Currencies A definition A virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. // // unregulated community based issuer determined private issuer digital ENT 470
  13. 13. Andreas Antonopoulos Bitcoin Foundation https://www.youtube.com/watch?v=c2CsJ2HMA2I Disrupt Bitcoin the first virtual currency ENT 470 w atch at hom e
  14. 14. Time for a BREAK Please be back in 15 minutes
  15. 15. Bitcoin basics
  16. 16. How to store bitcoin an intro ENT 470 HOT wallets are online allow for instantaneous transfer of funds greater ease of use but more vulnerable to hacking Wallets are where bitcoins are virtually stored and are used to make transactions. COLD wallets are offline more secure payment process is slower and more cumbersome
  17. 17. How to obtain bitcoin an intro EARN Like any currency, Bitcoin can be obtained in exchange for goods and services rendered. ATM’s ATM users first verify their bitcoin wallet by scanning a QR code on their smartphone. They then insert cash into the ATM and submit to complete the transaction. The appropriate amount of bitcoins are credited to their wallet (at current exchange rate). DIGITAL EXCHANGE Digital currency exchanges allow buying and selling Bitcoin at the current market rates. MINING Miners are the backbone of the Bitcoin ecosystem, providing services that help secure the network and keep it running. Miners are rewarded for their services with Bitcoin payments. ENT 470
  18. 18. How to spend bitcoin an intro PURCHASES A growing number of merchants are accepting bitcoin as a form of payment. P2P PAYMENTS Bitcoins’ fast transfer times, lower fees and absence of transaction limits make them an attractive option for micro-payments. INVESTING Bitcoins are frequently traded on digital currency exchanges. CHARITY Bitcoins offer a faster and safer way to give to charities in the developing countries marred by social and political unrest. ENT 470
  19. 19. Intro to Bitcoin
  20. 20. Bitcoin transactions (in a nutshell) ENT 470
  21. 21. www.blockchain.info(2015) The blockchain Miners worldwide ENT 350 USA EUROPE
  22. 22. Life inside a secret Chinese Bitcoin mine Inside a Bitcoin Mine the physical making of digital currencies ENT 470 https://www.youtube.com/watch?v=K8kua5B5K3I
  23. 23. Alietal.(2014) Some features of bitcoin Mainly, its strengths Decentralised Stable Transparent Fast, Cheap PrivateBUT The decentralized nature of Bitcoins eliminates the prospect of government control or ownership. The blockchain is a permanent public record of all confirmed transactions that occur in the system and an integral part of the Bitcoin ecosystem. The blockchain helps promote order and transparency while prevent counterfeiting. Digital payments to individuals and merchants can occur at anytime and are processed faster with lower fees. This is due in large part to removing banks from the transaction processing equation. Only a finite amount of bitcoin is available. Thus, no entity can manipulate bitcoin value through an increase or decrease in currency production. This leaves bitcoin value largely to the laws of natural supply and demand economics. Although all Bitcoin transaction details are stored publicly, the identities of the users involved remain relatively anonymous. These benefits extend to payments ranging from basic P2P transfers to remittances. Remittances are instantaneous and inexpensive, < 1% fee. FX fees are eliminated. ENT 470
  24. 24. The blockchain The true social innovation in bitcoins permanent chronologicalcompletepublic A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as 'completed' blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. // // ENT 470
  25. 25. The blockchain The true social innovation in bitcoins miners confirm the validity of transactions and add them to the blockchain A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as 'completed' blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. // // the blockchain publicly records the transactions between sender and recipient and allows verification the blockchain ensures each BTC is uniquely coded and therefore can only be spent once the systems allow the elimination of intermediaries (e.g., banks), creating new possibilities beyond the currency ENT 470
  26. 26. Nakamoto(2008) The blockchain The true social innovation in bitcoins Blockchain technology is arguably the greatest innovation of the Bitcoin system. The blockchain is a constantly updated public ledger of all transactions that have occurred. It provides transparency across the Bitcoin system, allowing transactions to be processed in a decentralized, trustless manner. ENT 470
  27. 27. Nakamoto.(2008) The blockchain The true social innovation in bitcoins identities transactions trusted third party counterparty public identities transactions public traditional privacy model new privacy model ENT 470
  28. 28. Nakamoto(2008) The blockchain The true social innovation in bitcoins Blockchain technology is arguably the greatest triumph of the Bitcoin system. The blockchain is a constantly updated public ledger of all transactions that have occurred. It provides transparency across the Bitcoin system, allowing transactions to be processed in a decentralized, trustless manner. ENT 470
  29. 29. BankofAmerica-MerrilLynchGlobalResearch The supply of Bitcoin million BTC, since launch ENT 470
  30. 30. Bitcoin as money
  31. 31. Alietal.(2014) Is Bitcoin money? According to the classical theory of money it is, but for limited numbers of users. can it become more widespread? Store of value average transactions per wallet USD 0.02/day encouraged by deflationary nature penalised by high volatility Medium of exchange currently little used in the long run, transaction costs will likely increase (end of mining) Unit of account little evidence of use merchants who accept BTC use USD as unit of account ENT 470
  32. 32. www.blockchain.info The market price of Bitcoin in USD, since launch price volatility ENT 470
  33. 33. www.blockchain.info Bitcoin transactions value in USD, per day (USD daily transactions are > $ 5 trillion) low value of transactions ENT 470
  34. 34. www.blockchain.info Bitcoin transactions number, per day possibly overstated ENT 470
  35. 35. www.blockchain.info Bitcoin transactions days destroyed still im perfect ENT 470
  36. 36. Time for a BREAK Please be back in 15 minutes
  37. 37. (some) Bitcoin business models
  38. 38. NO In-Class Quiz TODAY ENT 470
  39. 39. Case Study: BitGold BitGold vs Bitcoin (video) www.bitgold.com https://www.youtube.com/watch?v=l4d612am7ZQ ENT 470
  40. 40. Juan Llanos EVP Bitreserve https://www.youtube.com/watch?v=0GL9PTQiqxw Digital currencies like bitcoin are coming (and it's a good thing) The risks of virtual currencies everything is not so bad w atch at hom e ENT 470
  41. 41. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem wallets payment processors exchanges lenders investment vehicles hardware & equipment remittances others • software wallets • web & mobile wallets • payment service providers • payment networks • OTC bitcoin exchanges • spot & forward exchanges • P2P lending • bank-like borrowing •BTC hedge funds •BTC venture funds • BTC casinos • BTC binary options •BTC mining hardware •BTC ATMs • BTC int’l transfers • BTC mobile payments ENT 470
  42. 42. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem wallets Although a necessary part of the Bitcoin infrastructure, most of the reputable Bitcoin wallets are not monetized per se. Additional services, like currency exchange or merchant tools, provide revenue generating capabilities. Safety of a wallet is a prime concern for a user. ENT 470
  43. 43. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem payment processors Payment processing appears to be an attractive business model due to a large volume of transactions daily and a growing number of merchants accepting Bitcoin. Ability to acquire merchants is the key to success. Competition, however puts downward pressure on fees. ENT 470
  44. 44. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem exchanges Startups see a lot of space to innovate with additional trading services, exchange pairs (both currency and precious metals), and financial instruments (forwards, shares). However, market leaders process 75+% transactions. A novel unilateral exchange model is through ATM’s. ENT 470
  45. 45. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem hardware & equipment Hardware and equipment, built specifically for bitcoin, represent a recent development in the value chain. Despite the potentially capped demand for mining equipment (due to the capped bitcoin supply), the demand exceeds supply. ENT 470
  46. 46. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem investment vehicles ETF and mutual find-like investment vehicles are yet to gain popularity due to the volatility of BTC and potential of large players to influence the price. Prominent venture capital investors increasingly fund companies in the Bitcoin ecosystem. BTC Hedge Fund launched in Malta. ENT 470
  47. 47. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem lenders Lending platforms represent a great potential (with Bitcoin credit cards being a part of it). The operators release themselves of the liability for the loan repayment and from the guarantees on deposit investments. ENT 470
  48. 48. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem remittances Remittances are a $500 bil / year market. New BTC operators are entering the space (e.g., Kipochi integrated with M-Pesa, BitPesa…). ENT 470
  49. 49. The main Bitcoin ‘operators’ actors in the bitcoin ecosystem Miner Lease – Bitcoin mining contracts for investment; BTC Levels – platform allowing a user to profit from correct prediction of the BTC price forecasts; Satoshi dice – leading Bitcoin gaming site; Coinster – cryptocurrency search engine; BTCVoip – provides VOIP services at low prices for BTC only; BitcoinGet – allows earning bitcoins by watching the videos and completing simple tasks; Cryptcard - international prepaid Bitcoin loadable virtual MasterCard to get money to the people, who do not accept bitcoins. others ENT 470
  50. 50. Guest Lecturer: Mark Lamb CEO & Co-Founder of CoinFloor www.coinfloor.com ENT 470

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